November 24, 2015Announcing the “Rules of the Game” for Better Transparency in Lebanon’s Petroleum Bidding Process

An Interview with Ghislain Pastré, a lawyer and independent consultant specializing in advising governments in developing countries on extractive industries.

As part of the Lebanese Center for Policy Studies’ (LCPS) ongoing effort to monitor Lebanon’s oil and gas sector, LCPS in collaboration with the Lebanese Petroleum Administration held a closed roundtable on 30 October 2015, titled “Governance and Transparency in the Oil and Gas Sector”. Among those invited to address participants was Mr. Ghislain Pastré, a lawyer and independent consultant specializing in advising governments in developing countries on extractive industries. In addition to working for over twenty years as an in-house attorney at a US oil firm, Mr. Pastré in his role as a consultant has assisted many countries in implementing the Extractive Industries Transparency Initiative and designing, drafting, and advising on the implementation of laws, regulations, and contracts for oil and gas operations. LCPS sat down on the sidelines of the roundtable with Mr. Pastré to get his take on good governance in the oil and gas sector generally and his assessment of the sector in Lebanon more specifically.

What should be the ultimate objective of a bidding process?

The ultimate objective of a bidding process for exploration and production rights in a country like Lebanon, or for that matter any other country, is to attract the maximum number of serious bidders from competent oil and gas operators, in order to identify and select the most advantageous offer for the country. There is a fundamental issue about what should be considered an advantageous offer for a given country. It could be the investment—in other words the work program that will be conducted by the operator—or it could be the financial terms, namely, how the rent will be shared between the state and the investor. Often, it is a mix of these two elements. Their respective weight is a matter of strategic choice and may vary between blocs, depending on their specific prospectivity, location, and other considerations.

What is the importance of transparency in this process and how it can be achieved?

Transparency and objectivity are crucial features to a good licensing process for three reasons: First, they reduce the risk of corruption. The more transparent you are in a bidding process, the less risk there is that corruption may take place. Second, transparency is very important to attracting investments because serious investors are generally reluctant to participate in bidding rounds in which the rules of the game are not clear. The last reason, which I think is very important in the context of a country like Lebanon, is that they also protect decision makers; both the people in charge of organizing the bid round and evaluating the bids (in Lebanon the LPA), and the Council of Ministers or another body ultimately deciding on the awards. The transparent application of clear rules will protect them from being accused down the line of having made arbitrary selections, motivated by favoritism or, worse, caused by corrupt practices.

As for how transparency is achieved in licensing petroleum rights, it requires that a number of measures be put in place and complied with throughout the process. First, the “rules of the game” must be announced, so everyone knows how they will be treated in the bidding round. This is generally provided in a document called the “tender protocol” which will regulate the entire procedure in a clear manner, from the qualification of the applicants to the contract finalization and signature. Second, all relevant ministries, such as the Ministry of Finance and the Ministry of Environment must be involved in the procedure. Third, applicants must be placed on an equal footing, so that nobody is privileged or has special deals. Fourth, objective evaluation criteria or parameters must be used in the evaluation of the bids. Finally, the rules of the game and the awards must at all stages be communicated to the applicants and the public at large. This is often done through the website of the competent ministry or petroleum administration.

What do you think is the best way to handle the bidding process to ensure that you can reduce the risks of corruption?

I think it all boils down to the recurring key element of objectivity and transparency throughout the process. In the context of Lebanon, it seems that a lot of thought has already been given to how that can be achieved through the selection of a minimum number of parameters or biddable items, a rather simple evaluation system, and a prequalification process screening of the technical, financial, and legal capabilities of the applicants.

Do you think the Lebanese Petroleum Administration should disclose its recommendations to the public?

The decision to publish a number of recommendations throughout the process I think deserves to be carefully thought through, including the publication of the model (and final) exploration and production agreement, of the tender protocol, and possibly the publication of the evaluation report following the evaluation of the bids. There are a number of elements surrounding your question, including: How will the bids be assessed? If you have a simple system of parameters, it could entail a simple calculation of the various elements and deriving figures to determine who the winner is. Some countries like Brazil follow this model. However, it may be considered important that some element of discretion in making the final decision be reserved for the Council of Ministers. But the exercise of such discretion should then be subject to some safeguards, including transparency in the grounds or justification for the decision.

Transparency may also be enhanced if the bid evaluation is entrusted to an enlarged commission composed of representatives of various ministries and agencies, and possibly, as done in Brazil, of civil society organizations.
Also, as used in the past by certain countries like Nigeria and Timor Leste, the appointment of international consultants as observers to attend and report on the fairness of bid rounds may be a useful practice from a good governance standpoint.

This being said, it must be recognized that there is no single system appropriate for all governments and all circumstances for licensing petroleum rights and that each country must design its own system taking into account its own specific objectives and constraints, but always keeping in mind the paramount importance of objectivity and transparency.